2/13/2012

OMFED

A LIVE CASE ON EXISTING SUPPLY CHAIN CHALLENGES

ABOUT THE COMPANY The Orissa State Co-operative Milk producers FEDerations Ltd. (OMFED) is the leading organized milk producer of Odisha. Its main activities include promoting production, procurement, processing and marketing of milk and milk products for economic development of the rural farming community of Odisha. BACKGROUND Odisha is one of the poorest states in the country. Although the state is abundant in natural resources, the pace of industrial development has been very slow due to various reasons (which are outside the purview of the case). Majority of the population is dependent on agriculture, animal husbandry and other such related activities. To make things worse, poor irrigation facilities and frequent natural calamities provide very detrimental conditions for sustainable agriculture which can provide decent livelihood to the dependent population. Due to which there is heavy migration from villages to cities. Incidentally though there is a large concentration of cattle (cows & buffalos) in rural areas. But the per capita ownership of cattle is not large enough to justify organized milk generation and selling. That is why it was never thought of as a viable alternative to provide livelihood to the rural people. This is precisely why OMFED came into the picture. It not only provides livelihood to the people of rural Odisha but also provides the urban middle class with a safe hygienic source of milk. PRIME ACTIVITIES OF OMFED Procurement of milk Providing technical input to the milk producers Provide training in new & scientific methods to increase productivity of milk in the state. Storing (chilling) the milk Processing & Marketing of the same

STRUCTURE OF OMFED SUPPLY CHAIN (THE ANAND MODEL) To achieve the above mentioned objectives OMFED has designed its supply chain to suit its customized needs. OMFED follows a three tier system that was originally pioneered by AMUL dairy in Gujarat, India. In this three tier system of operations the various components are 1. The Village Cooperative Society ( the actual milk producers) 2. The District Milk Union (the middle tier which collects milk from the producers and also provides them required inputs). 3. The Milk Federation (processing & marketing of milk). Unlike in traditional systems where middlemen used to dictate terms to the actual producer by offering lower price to them, in this system the collective ownership lies with farmers & thus ensures a fair price to the farmers. Since 26th January 1981 when OMFED started functioning, it has made its presence felt in many districts of Odisha. It is present in majority of districts of western & coastal Odisha (Annexure I). Milk is procured from various village cooperative societies throughout these districts twice daily. From which it is sent to the chilling centers at the nearest District Milk Union in hired trucks. From the Milk Unions it is sent to the nearest Milk Federation dairy for processing and marketing.

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VILLAGE COOPERATIVE SOCIETIES

MILK UNIONS

PROCESSING CENTER MILK FEDERATION

*The Figure above shows thee overall supply chain network at OMFED

Village Cooperative Society This is the first tier in the whole system. It is a voluntary association of milk producers in a village willing to sell milk collectively. Any milk producer can become a member by paying a nominal fee of `1 and buying a share of `10. The milk producer is expected to sell only the surplus milk to the society after meeting his personal needs. The members elect a committee and a chairman too to better manage things. The committee then selects some more people to act as aides (milk tester, secretary etc.). Milk producers bring milk to the society every morning & evening. A sample of the milk from each producer is taken and tested by a lactometer for quality. The society sells milk only to the nearest District Milk Union. District Milk Union The milk Union then carries the collected milk from the society by using hired transport vehicles to their processing centers. Milk is chilled to 5C in the chilling centers. The collector of the district is the chairman of the District Milk Union. It is also the job of the milk unions to provide technical input (new methods like artificial insemination etc.), training and sometimes even to provide cattle feed & fodder etc. to the village societies. The Milk Union gives various technical inputs to the producers to enhance their milk productivity. This is done in the hope that excess productivity will result in excess of surplus milk with the producer which he can then sell to the village society. Some of the prominent technical input programs (TIP) are Embryo Transfer Technology (ETT) Artificial Insemination (AI) Feed & Fodder programs Training (Orissa Milk federations integrated Training & Development Center: OMTDC)

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Milk Federation The milk federation provides for processing and marketing of milk & milk products. The chilled milk from milk union is sent to the nearest federation dairy for processing, packing and marketing. The Federation is managed by a Board of Directors (BOD). The federation has representation from various milk unions and also from the state government of Odisha. The BOD choses a chairman from among its members. One more important feature in this supply chain is that after marketing the products whatever monetary realization is achieved is routed back through the supply chain to the producers once in 10 days. The milk and milk products are being marketed by authorized retailers of OMFED throughout the state. The urban customer is the last point of the milk flow supply chain of OMFED. OMFED milk is supplied in standard poly packs to the authorized retail centers once every morning in small hired OMFED trucks. These trucks pick up milk from the nearest federation dairy and have to cover all authorized retail outlets in particular area assigned to them.

VARIOUS PRODUCTS OFFERED BY OMFED 1. Milk & Milk Products 2. Horticulture Products 3. Organic Turmeric under the brand name of Kandhamala But this case deals only with the procurement and distribution of milk and milk products in OMFED.

The following are the various SKUs offered by OMFED 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Toned Milk (containing only 3% fat) Double toned milk (containing only 1.5% fat) Full Cream Milk ( containing 4.5% fat and added vitamins) Plain curd (prepared from double toned milk with necessary additives) Sweet curd Table Butter Pure Ghee Butter Milk Lassi Ice Cream Bottled Milk

CHALLENGES IN THE MILK SUPPLY CHAIN OF OMFED In a massive supply chain like OMFEDs which deals with an extremely perishable products like milk, there are bound to be many problems. And so is the case with OMFED. OMFED is not like any typical organization but rather organized as a cooperative comprising of various village societies and district milk unions. This leads to issues resulting from maintaining consistent product quality throughout the procurement chain. All though diligent care is taken in milk testing at village societies there has been cases where the testing personnel (who use lactometer to test the viscosity of the milk) has been duped by addition of cheap milk powders to increase the viscosity of the milk.

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The supply chain requires cold chain infrastructure throughout the supply chain. A good cold chain system comprising of bulk storage facilities throughout the state, cold chain enabled vehicles is already in place throughout the geographical area that OMFED covers. But owing to the condition and lack of availability of such modern infrastructure in the state there lies a huge scope for improvement in the same. All though our source could not exactly divulge the wastage (due to organizational policies) in the existing system, he was able to give an approximate figure of 20-25%. This is a tremendous opportunity for improvement. But this requires huge investment for which OMFED is not ready right now. The improvement in road infrastructure in Odisha due to national programs is promising for the future though vis--vis OMFEDs future plans. The parts of Odisha which are urbanized and could be potential markets for pasteurized & packaged milk have been mostly covered by OMFED. It has loyal customers throughout the state. But there is a lot of scope to improve & tap potential procurement areas in the rural market. When this aggressive strategy by OMFED is realized the supply of milk and milk products will far exceed the demand in the state. That is why OMFED has already planned for expansion into nearby townships in other states especially West Bengal. Kharagpu, Midinapu, Digha, Kolkata are such examples. But to distribute a perishable product like milk to these far flung areas poses a supply chain nightmare for OMFED. To deal with this OMFED id planning to increase the capacity of its Balasore dairy plants and the milk unions which serve the dairy plant. This is because Balasore is strategically placed to serve the above mentioned markets in West Bengal. Another problem is that of reverse supply chain. Any milk or milk product that is not sold at the retail outlets within the consumable period of the product (which of course varies from product to product) has to be brought back to the nearest dairy plants of the cooperative. This is a loss for the cooperative. Our source could not divulge the details of the percentage of this amount being reverse shipped but gave an approximate average figure of 7-10%. This figure is low because of the high brand loyalty that OMFED has in the state. But as and how the quantity and volume of milk and milk products increases through the chain this volume is expected to increase. At the first place this figure arises because of the mismatch between expected demand and actual demand at each retail outlet. This is one aspect that the cooperative has to look into in the future.

COMPARISON WITH OTHER COMPETITORS: Amul: What makes Amul the BIG BOSS of the diary space is its low cost price strategy to make its products affordable and attractive to consumers by guaranteeing them value for money, thus developed demand. Introducing higher value products: Beginning with liquid milk, they enhanced the product mix through the progressive addition of higher value products while maintaining the desired growth in existing products. It ensures that the product mix and the sequence in which Amul introduces its products is consistent with the core philosophy of providing milk at a basic, affordable price. The distribution network: Amul has 10 lakh retailers and 5000 dealers in the country. Procurement: The quantity and quality of milk procured is the backbone of the dairy products. Due to its cooperative roots, Amul collects 3.45 billion litres of milk from over 3 million farmers. Umbrella brand: The network follows an umbrella branding strategy. Amul is the common brand for most product categories produced by various unions: liquid milk, milk powders, butter, ghee, cheese, cocoa products, sweets, ice-cream and condensed milk.

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Coordination: Given the large number of organizations and entities in the supply chain and decentralized responsibility for various activities, effective coordination is critical for efficiency and cost control. The

federation handles the distribution of end products and coordination with retailers and the dealers. The unions coordinate the supply side activities. These include monitoring milk collection contractors, the supply of animal feed and other supplies, provision of veterinary services, and educational activities.

SUGGESTIONS FOR OMFED: OMFED as discussed since it consists of many parties as stake holders, its organizational structure should emphasize on quality issues which would insist its suppliers to have a consistency in its quality. The awareness of quality should be spread among its suppliers. It should also be followed by conveying the importance of Ethical practices in any business with regular checks being conducted. The problem of lack of infrastructure can be solved by approaching the government bodies for help on grants for the same. Management students can be encouraged to develop an optimized location of a warehouse with cold storage, to minimize the cost of development. Also since they face the forecast errors, causing the discrepancy between the expected demands, the people who manage this supply chain should know all the aspects which help to forecast the demand. It can also be done with the help of distributers who supply their product at various places.

LEARNING FROM THE CASE: The case helped us to understand the supply chain of OMFED and that of the huge giant AMUL. It has shown the importance of cold storage and low price strategy that AMUL has adopted to tap its customers. Thus understanding your customers is also vital. It has helped us understand that not just urban market but we need to focus on the rural market as well to expand the customer base. Quality has become the first priority now and having a consistency in quality by satisfying your customer demands, is one of the aspects for improvement. For an organization to succeed, it is not only important to satisfy its external customers but also internal as well. It is important that an organization maintains coordination among its activities, keeps its employees satisfied, provide them the best training, and incorporate the best HR practices to ensure proper team building.

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ANEXXURE I

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ANNEXURE II

*Figure above shows the supply chain network of OMFED along with various milk unions & various dairy PLANTS in Odisha

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ANEXXURE III

Serial Number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Plants ADASPUR ANANDPU ANGUL ATHAGARH ATHMALIK BALIKUDA BANKI BARGARH BARKOTE BEGHAMARI BIJEPUR BRAHMAGIRI BUXMA DOODHIANALI KENDEIJURI KENDRAPADA NAYAGARH NIMAPARA PADAMUR TANGI TELKOI TIRTOL

Capacity (litres) 4000 4000 2000 2000 1200 10000 1800 8000 250 1000 500 1000 800 250 250 4000 2000 20000 2000 2000 2000 20000

* The table above shows the list of chilling plants along with their capacities (in litres) at various Milk unions in OMFED

ANEXXURE IV Serial Number 1 2 3 4 5 6 Plants BALASORE BHUBANESWAR DHENKANAL KEONJHAR ROURKELA SAMBALPUR Capacity (litres) 5000 100000 10000 10000 30000 30000

* The table above shows the list of dairy processing plants along with their capacities (in litres) at in OMFED

SUPPLY CHAIN MANAGEMENT ASSIGNMENT | MBA 2011-13

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